Most sources say to have about 6-12 months of living expenses saved up in the event of a job loss. Is it wise to add the 6 months worth of unemployment benefits to the total of cash you have saved up? Or is it a risky assumption to count on getting them?
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2Not just job loss, but a major car repair, natural disaster, major illness, major home maintenance, or emergency travel. There are lots of reasons to have an emergency fund. Many will take all of the money at once.– MrChristerCommented Jun 5, 2013 at 16:29
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Essentially it covers any uninsured risk. Unemployment benefits are a form of insurance, so they reduce the chances of needing the emergency fund.– MSaltersCommented Jun 6, 2013 at 14:53
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3 Answers
If your emergency fund is used strictly in the event of a job loss, you may want to factor in your unemployment benefits. But note! You will not necessarily receive unemployment benefits. In many countries, you are not eligible if you are fired. Additionally, I've seen people laid off but denied benefits until they spent several months fighting the decision. So, it's wisest not to count on unemployment benefits. Even if you do, note that they often take a while to kick in. Six to eight weeks in Canada, for example.
It is also a good idea to consider what else could cause you to tap into your emergency fund. A death of a spouse or a parent may leave you with $10,000 to $30,000 in funeral expenses that you have to pay within two weeks, months before any life insurance would kick in. If you own a house, your furnace or hot water tank may fail and need immediate replacement. Generally, you'd cover these from an emergency fund, though your specific case may be different.
There's obviously an opportunity cost to keeping too much in cash or cash-like investments in your emergency fund, so you'll want to take that in to consideration as well.
My personal opinion is that you should have at least 6 months of living expenses saved up, not counting on any unemployment benefits. You should also have enough to cover the other emergencies such as the ones I raised, though sometimes you can borrow from family for that sort of thing. Beyond 6 months, I'm willing to factor in benefits, less-liquid investments, etc.
answered Jun 5, 2013 at 16:27
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"not eligible if you are fired.". I take it you mean "not eligible if you resign.", i.e. not when the employee takes the initiative. Firing means the employer took the initiative. You usually can't benefit insurance-wise from your own decisions.– MSaltersCommented Jun 6, 2013 at 14:57
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In my jurisdiction, you are not eligible if you are fired, but are eligible if you are laid off. But as you point out, not eligible if you resign, except in some specific situations. Commented Jun 6, 2013 at 17:31
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That's probably a jurisdiction thing, then - I assume employees are protected against firing without cause?– MSaltersCommented Jun 6, 2013 at 23:36
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Yes. You cannot be fired without cause, though you can be laid off. Sometimes, there are... disagreements... on the definition but it's pretty rare. Commented Jun 7, 2013 at 11:48
You can count unemployment benefits, I suppose. But that's not cash in the bank.
You can count the limits on your credit cards if you want, too. But that's also not cash in the bank. Your creditors don't have to offer you forbearance.
Cash is liquid. Future unemployment benefits are cash when you get them, but not until you get them.
If you're starting to look for reasons to include these kinds of quasi-funds in your emergency fund, that's an indication that you're not done building up your cash reserves. I'd keep doing that until you don't have to rely on credit or the like.
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Yes, available credit is liquidity, but holds no value. Future benefits hold value, but lack liquidity. The combination therefore is a substitute for cash, but obviously you can count it only once.– MSaltersCommented Jun 6, 2013 at 15:01
If you are creating a "If I lose my job fund," and believe that where you live there is a 99.9999% chance of being approved for unemployment then I could see taking that advice. However, I don't see that as particularly realistic to my mind as I have had cases of job loss where I was denied unemployment and thus had to go into savings to pay bills.
If I have to suddenly fix my car because of a flat tire, or my glasses get broken accidentally, these are costs that I have to have some money saved up somewhere to pay for that and thus a general emergency fund of a 6-9 months of expenses can make sense for a ballpark for that amount. However, notice that this is for any kind of emergency which could be unemployment or it could be other stuff too.
I was denied because I was terminated for insubordination in that position. This was in Alberta, Canada for those wondering where in the world this was.
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Thanks for the response. For what reasons were you denied unemployment? I'm trying to determine whether or not counting on unemployment benefits is a reasonable risk. Commented Jun 5, 2013 at 16:26
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1+1 The 6 to 12 months isn't completely about a length of time to need, it is a simple number that reflects lifestyle and will probably be plenty to cover other unavoidable unplanned expenses. Commented Jun 5, 2013 at 16:29
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Length of time is a factor, as well as the job loss must be involuntary. Also, you can only receive so much unemployment income within a given time period. So if you are really unfortunate or work in a very insecure industry, you could potentially exhaust your eligibility for unemployement in the short run. Commented Jun 5, 2013 at 18:56
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1Don't forget that unemployment rights vary by jurisdiction....– VickyCommented Jun 6, 2013 at 9:24